How can inventory turnover be calculated?

Inventory turnover is calculated by measuring sales against current stock levels. This calculation reflects how efficiently a company is managing its inventory by showing how many times inventory is sold and replaced over a specific period, typically a year. A higher inventory turnover ratio indicates that a company is selling goods quickly and may imply strong sales performance and effective inventory management practices.

When you assess sales against current stock, you gain insights into inventory management efficiency, highlighting the relationship between the amount of inventory held and the volume of sales generated. This metric is essential for businesses to ensure they are not overstocked with items that are not selling or understocked on items that are in high demand, helping to optimize overall operations and cash flow.

Counting the total number of items, evaluating supplier reliability, or analyzing customer satisfaction, while important for different aspects of business operations, do not provide a direct measure of how often inventory is sold over a specified period and so do not function as a means to calculate inventory turnover.